There are of course benefits to filing a joint tax return with your spouse: eligibility for tax deductions and lower tax rates come to mind. However, there can be severe repercussions that come from filing jointly, and those occur when items are improperly reported on or when income is even omitted from the tax return. If the IRS determines there are erroneous items in your return, such as unreported income or incorrect deductions, and you and your spouse have filed jointly, then both of you will be held responsible for the liabilities.

However, situations arise where one spouse may not have known about the erroneous items, or may have been coerced into signing for them. To combat such situations, innocent spouse relief is available under Internal Revenue Code (IRC) (26 U.S.C. 6015). Provided you meet the qualifications, you may qualify to be relieved of the joint tax liability. Applying for innocent spouse relief is not as simple as it may be described in some publications. I am listing the basic process in this post, but please consult a tax professional before filing out Form 8857 that starts the innocent spouse process.

Basic Qualifications:

You and your spouse filed jointly

On the return, there is an erroneous item that is your spouse’s fault

You can prove that when you signed the return, you held no knowledge of the erroneous item

The circumstance shows it would be unfair to hold you accountable

On the IRS website there is information for determining if you are eligible for Innocent Spouse Relief. It can be found Here

If your spouse has embezzled their income, for example, or attempted to defraud the IRS without your knowledge in any other way, even if you signed a joint tax return together, you can avoid the joint tax liability and penalties, provided you meet the qualifications of Innocent Spouse Relief, by filing Form 8857. Filing this form will begin the process of detaching yourself from the liabilities. Keep in mind that the IRS generally requires this form to be filed within two years after they attempt to collect the tax, but there are exceptions. IRS Notice 2011-70 “expands the period within which individuals may request equitable relief from joint and several liability under section 6015(f) of the Internal Revenue Code (IRC). Specifically, this notice provides that the Internal Revenue Service will consider requests for equitable relief under section 6015(f) if the period of limitation on collection of taxes provided by section 6502 remains open for the tax years at issue.” See Notice Here

Equitable relief

Recently, the IRS announced new procedures (see Rev. Proc. 2013-34) for requesting equitable innocent spouse relief from joint liability under IRC section 6015(f). Equitable relief may be allowed by the IRS if “taking into account all the facts and circumstances it is inequitable to hold the individual liable for any unpaid tax or any deficiency (or any portion of either)”; and relief is not available to the individual under the other subsections of 6015.

Rev. Proc. 2013-34, provides a streamline procedure if certain requirements are met, and, most importantly, this revenue procedure gives greater deference to the presence of abuse in claiming equitable relief. The IRS recognizes that abuse can be relevant with respect to the analysis of other factors. The revenue procedure was intended to give greater weight to abuse when its presence impacts the analysis of other factors. The IRS broadens its view of how a person being subjected to financial control or abuse affects the other various prerequisites for relief.

If the requesting spouse was abused or the nonrequesting spouse controlled the finances by restricting access to financial information, and because of this “abuse”, the requesting spouse could not object or change the tax return or question the payment of taxes or was afraid to challenge the nonrequesting spouse’s preparation and control of the tax return because of fear of retaliation, then the abuse or control will support this factor for relief in consideration of other factors.*

There are many factors to prove in requesting equitable relief. The facts and circumstances are very important, and it is very important that you present the information to the IRS in the proper way.

As mentioned above, applying and getting IRS approval for innocent spouse status is not simple. If you make a simple mistake on Form 8857, the IRS will most likely deny your application. Of course, there are appeals available, and your tax professional (or you) may file in the United States Tax Court for a determination of your claim for innocent spouse relief.

Contact me for more information on your options if you believe you may claim innocent spouse relief. I can assist you in filling out Form 8857 (very important), appeal the IRS denial and file a petition in the United States Tax Court, and, if necessary, litigate your case in the court.

Our friends, the IRS, modified the “use-or-lose” rule for health flexible spending arrangements (health FSAs) so that at the plan sponsor’s option, participating employees may carry over up to $500 of unused amounts remaining at year-end. Previously, any amounts that weren’t used by year-end would be forfeited. Certain plan sponsors may be eligible to take advantage of this option as early as plan year 2013.

Health Flexible Spending Accounts

Health FSAs are benefit plans that many employers provide to employees to reimburse employees for health care expenses. The great deal for employees is that qualifying contributions to and withdrawals from FSAs are tax-exempt. Contributions to these FSAs are tax exempt–no tax paid.

Unused FSA contributions left over at the end of a plan year have historically been forfeited to the employer under the so-called “use-it-or-lose-it rule.” With the new changes if you have money left at the end of the year, you can now carryover $500 to the next year and use it in addition to the maximum contributions allowed by your employer’s plan. See all the boring “technical details” right here IRS Notice.

Annual Tax Inflation Adjustments

For tax year 2014, the Internal Revenue Service announced annual inflation adjustments for more than 40 tax provisions, including the tax rate schedules, and other tax changes.

The tax items for tax year 2014 of greatest interest to most taxpayers include the following dollar amounts.

The tax rate of 39.6 percent affects singles whose income exceeds $406,750 ($457,600 for married taxpayers filing a joint return), up from $400,000 and $450,000, respectively. The other marginal rates – 10, 15, 25, 28, 33 and 35 percent – and the related income tax thresholds are described in the revenue procedure.

The standard deduction rises to $6,200 for singles and married persons filing separate returns and $12,400 for married couples filing jointly, up from $6,100 and $12,200, respectively, for tax year 2013. The standard deduction for heads of household rises to $9,100, up from $8,950.

The limitation for itemized deductions claimed on tax year 2014 returns of individuals begins with incomes of $254,200 or more ($305,050 for married couples filing jointly).

The personal exemption rises to $3,950, up from the 2013 exemption of $3,900. However, the exemption is subject to a phase-out that begins with adjusted gross incomes of $254,200 ($305,050 for married couples filing jointly). It phases out completely at $376,700 ($427,550 for married couples filing jointly).

In my last blog post, I briefly introduced the new reality – that high income taxpayers will face additional taxes, starting in 2013. Indeed, “sticker shock” is the phrase I see most often about what awaits certain taxpayers when preparing their 2013 return.

Higher Income Earners

So, what’s new? Higher earners, moving forward, now will be subject to a set of new taxes, higher rates, and new limitations on deductions. Who is a “higher income” taxpayer? As you will see below, this is a bit of a moving target. And, what does this mean for your 2013 taxes?

Tax Rate Changes

First, rates have changed. Under the American Taxpayer Relief Act of 2012, higher tax rates apply to ordinary income, capital gains, and dividends. The income tax rates for most individuals stay the same as in 2012 (i.e., 10%, 15%, 25%, 28%, 33% and 35%). A new 39.6% rate applies, however, for 2013 for income above $450,000 for joint filers and surviving spouses; $425,000 for heads of household; $400,000 for single filers; and $225,000 for married taxpayers filing separately. Also, the top rate for capital gains and dividends rises to 20% for 2013 (up from 15% in 2012) for taxpayers with the same income levels noted above.

Limitations

Second, limitations are imposed on the use of the personal exemption and itemized deductions. There is a personal exemption phase out for 2013 with a starting threshold of $300,000 for joint filers and surviving spouses; $275,000 for heads of household; $250,000 for single filers; and $150,000 for married taxpayers filing separately. Under the phase out, the total amount of exemptions that can be claimed by a taxpayer is reduced by a certain percentage for every set amount the adjusted gross income exceeds the relevant threshold. Also, itemized deductions are limited for higher earners, using the same dollar amounts as for the personal exemption phase out.

Affordable Care Act

That was the new world according to the Taxpayer Relief Act. Now, in the context of the Affordable Care Act, See IRS site on all tax aspects of Affordable Care Act, Click Here , you are a higher income earner if you earn in excess of $250,000 if you file joint returns; more than $125,000 for married taxpayers filing separate returns; and over $200,000 in all other cases. First, starting in 2013, there is a higher payroll tax for high-earning workers and self-employed taxpayers. An additional 0.9% hospital insurance tax will be applied as a component of the Federal Insurance Contributions Act (FICA) payroll tax imposed on wages in excess of the $250,000; $125,000; and $200,000 noted above. The additional 0.9% tax also applies to self-employment income in excess of the above figures.

Oh No, Surtaxes

There will also be a new surtax on the unearned income of higher-income individuals. An unearned income Medicare contribution tax is imposed on individuals, estates, and trusts. For an individual, the new surtax is 3.8% of the lesser of either net investment income; or the excess of modified adjusted gross income over the threshold amount ($250,000 for a joint return or surviving spouse, $125,000 for a married individual filing a separate return, and $200,000 for all others). For surtax purposes, gross income doesn’t include certain excluded items (e.g., interest on tax-exempt bonds).
Those are a lot of changes that are arriving for 2013. Hopefully, you and your tax professionals kept up during the year. If not, year-end tax planning activity may be especially busy. And, 2014 is likely to be busy as the IRS mails out its first examination letters for returns completed under the new rules.

If you have problems or issues with the IRS or other tax authorities, please contact Lowrance Law LLC at 703.506.1600.

A comprehensive list of questions and answers on the impact of the current government shutdown on IRS and tax administration has been published by the American Institute of CPAs Tax Section. The Question & Answer page was created to help practitioners working to complete tax returns by the October 15 filing deadline.

The organization said it “has urged the IRS to consider the substantial burden imposed on taxpayers (and practitioners) by the inability to communicate with and obtain information from the IRS.” The AICPA Tax Executive Committee “is currently considering whether it is appropriate to advocate for a legislative solution to provide for an additional extension of time to file tax returns.” The Q&A page can be accessed at http://bit.ly/1byGpvU.

The government shutdown is having a severe impact on every slice of the US economy. US government employees are not being paid, and many workers live paycheck to paycheck. The Congress should do their job instead of bickering among themselves over health care for all Americans.

Some of the Questions presented are the following:

Will individual taxpayers still need to file by October 15th or can the IRS extend due dates?
Will the IRS provide an expedited or automatic abatement of penalties for late-filed tax returns?
Will the practitioner hotline remain open during a government shutdown?
Will examinations continue during a government shutdown?